How to get a tax cut

By Thursday (May 8), both the House Ways and Means Committee and the Senate Finance Committee will have completed mark-up of a major tax bill. They will probably bear little resemblance to each other, because the Senate is operating under a $350 billion revenue loss cap, while the House has $550 billion to play with.

Within even the lower number, there is a lot of good that could be done. But it is essential for the White House to push as hard as possible for meaningful growth provisions. Unfortunately, it is not doing so because it is still wedded to its own $726 billion plan that has no chance of passage as-is.

I strongly supported President Bush's proposal to eliminate the double taxation of corporate profits by allowing shareholders to receive dividends tax-free. But since that proposal was made in January, the economy has been much more sluggish than the administration or I expected it to be. This means that there is much greater need for tax cuts that will provide more immediate stimulus than the president's plan does.

The White House recognizes that the political and economic landscape has changed. But rather than alter its proposal, it has simply revised its rhetoric. Now, instead of making the correct argument for its dividend plan -- that it will raise productivity, growth and incomes over time -- the White House talks only about jobs, jobs, jobs. The problem is that the dividend plan probably won't create many new jobs, and very few of those will come in the short run.

True, the Council of Economic Advisers has forecast that by 2004 there will be 900,000 more jobs than would be the case without additional stimulus. But there are any number of stimulus proposals that would be predicted to do as well or better, given the council's methodology for calculating the figures. Basically, it used a standard Keynesian model in which tax cuts stimulate growth mainly by increasing demand via the deficit. There are no supply-side effects in this analysis.

The problem is that fiscal stimulus can probably be delivered more efficiently in other ways. This means that the same model the council used could potentially show more jobs being created in the short-run with the same impact on the deficit. Moreover, the nature of Keynesian demand models is such that the impact of fiscal stimulus wears off once the economy gets back to its potential. In other words, there is no permanent increase in jobs or growth.

Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.

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